Apartment underwriting has never been a simple exercise in which you can just copy and paste last year’s growth projections, but in 2025, the trend lines have left commercial real estate investors in unfamiliar territory. For three months and counting, national rent growth sits in negative territory, a development that has upended the assumptions baked into decades of traditional multifamily underwriting. The market’s adjustment to this reality, as well as the investor psychology surrounding it, were the central themes of a recent discussion led by Gray Capital CIO Jay Reeder on The Gray Report podcast.
The Pro Forma Dilemma
For Reeder and his team, the conundrum is existential: “I don’t know how you pro forma something and buy something and underwrite it when you have negative rent growth, with negative rent growth forecasted for future years and significant amount of supply still coming online,” he said, pointing to a slate of U.S. markets seeing effective rent changes of negative 8% or more and continued property deliveries.
Gone are the days when a “basis play” or “discount to peak pricing” could justify an acquisition on paper. With rent rolls subject to unpredictable downward pressures and new lease anomalies from revenue management tools, experienced buyers are forced to scrutinize rent rolls in atypical ways.
“The in-vogue thing to do is—what’s the average of the last three leases signed?” Reeder asked. “But what’s the average of the last three leases signed on a normalized amount? Because... you may have someone on a 14-month lease paying above-market rent just for the timing, and seeing an outlier on the rent roll no longer tells you what you’re really likely to achieve across a portfolio.”
The New Risk Environment
This heightened risk environment is not being met, uniformly, by discounted prices. In many cases, sellers refuse to budge, clinging to 2021 and 2022 valuations that relied on cap rate compression and projected rent jumps that are now impossible to pencil in. Investors flush with cash but hungry for yields are split between those accepting muted returns—sometimes with internal rates of return below 9% and those waiting for resets. The result, Reeder said, is a stand-off that’s “making it difficult, but it shouldn’t be easy. It shouldn’t be easy.”
A more granular approach to both expense loading and revenue assumptions has become necessary. Rather than assuming a healthy rent “lift” from a value-add or lease-up play, Reeder described an era in which owners might be “just treading water,” seeing little to no net operating income growth year over year—and in some cases, declines due to rising expenses.
“There is a portion of our portfolio that we’re getting the renewals, but we’re kind of treading water,” he said. A transaction that looked attractive twelve months ago may now look deeply unattractive once more realistic rent projections are substituted in.
Revenue Management Complications
The prevalence of dynamic pricing tools—used by owners to calibrate lease rates daily—has also undermined underwriting certainty. “When you ask, what are your two bedrooms going for? There may be a $200 or $300 difference between what people are being charged on the rent roll, depending on when they sign the lease and when their lease expires,” Reeder explained. For buyers, this creates the need for a forensic approach to the rent roll, hunting for statistical aberrations that might disguise underlying softness in actual demand.
Sustained negative rent growth is also filtering through to capital markets. Lenders take a dim view of underwriting that relies on aggressive assumptions when recent history shows sharp, lingering rent cuts, especially in overbuilt markets. The “rub,” as Reeder labeled it, is that valuations may be stuck at today’s lower thresholds far longer than many investors predicted just 12 to 18 months ago. Many deals are trapped in a holding pattern, with owners “cutting these rents to get to that area where they can get some sort of exit,” he said, but at yields unattractive to new equity.
Psychological Impact and Future Discipline
The psychological impact cannot be ignored. Veteran investors accustomed to relying on financial engineering and projected cap rate compression are now faced with the need for a dramatic shift in approach. Today’s market calls for discipline rooted in operational results, careful expense management and robust downside protection, rather than optimism about future appreciation. As Reeder emphasized, the focus has moved towards income-driven performance, requiring investors to validate every input with tangible evidence and to prioritize the long-term resilience of each asset over speculative gains.
Ultimately, underwriting in a negative-rent-growth environment requires an inversion in traditional multifamily reasoning. Protecting downside, validating every optimistic input with operational evidence and ensuring a margin of safety are now paramount. As Reeder put it, “the emphasis of avoiding loss is more important than chasing high returns.” In today’s market, the most valuable asset may well be the ability to walk away from an uncertain pro forma number and wait for fundamentals to reassert themselves.
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